Purpose of Tax Free Bonds:

Tax Free Bonds have emerged as one of the most popular investment options among the common investors. These are the bonds which are issued by government enterprises mostly and fetch a fixed rate of return to the investors. Mostly these are used to finance the projects having a long gestation period. As the proceeds from the bonds are invested in infrastructure projects, certainly they have a long-term maturity of 10, 15 or 20 years.

Benefits of Tax Free Bonds:

Tax free bonds fetch you the return in the form of 2 ways. One is by way of giving certain % of return on bond and the another benefit is tax saving. Interest earned on this bonds does not attract tax. Even Tax is not required to be deducted on the interest amount credited to the investors account by the issuer. As this it self is a major benefit to the investors, amount invested in bonds will not be qualified for deduction.

Interest Rate of Tax Free Bonds:

Interest paid on these bonds is directly linked to the rate of return given by various government securities in the market. Interest in directly credited to the bank accounts of the investor. When the performance of the government securities is well there may be a chance of getting very good returns from these bonds.

These bonds score less in terms of liquidity. As the funds invested in these bonds are mainly for the long term purposes they carry longer maturity period. Hence the funds are blocked for years together unless like fixed deposits which give you various flexible maturity periods.

Risk :

Since these are mainly programmed to give financial support to the government backed enterprises, they are very secured in nature. So the investors do not need to worry about the risk of loss.

These are traded in secondary market. So it gives the advantage of capital appreciation over a long term. Depending upon the performance of the enterprises by whom these are issued the value of the bonds in the open market have chances of getting high worth.

Tax Free Bonds 2015-16:

This year a Government has given permission to seven entities to raise funds through the route of Tax Free Bonds worth Rs.40,000/- crore. Since 2013 in which they tax free bonds received a huge response from the investor groups government is so keen on encouraging the investors by allowing the enterprises to issue these bonds.